This article was originally created for Hayes Knight (now Nexia Auckland).

17 October 2013
| Did you have, or do you have, a foreign superannuation fund
By Shelley-ann Brinkley – 17 October 2013

If so, the tax rules are changing from 1 April 2014 and you may be affected

For those of you who have an overseas superannuation fund, or have transferred or made a withdrawal from that fund in the past, these rules will affect you which could mean a large tax bill.

The good news is, there is an opportunity to act now to substantially reduce that potential tax bill.

What is happening?

The Government has issued draft legislation that is intended to simplify the tax treatment of New Zealand tax residents’ overseas superannuation funds.  The current tax rules are extremely complex and as a result compliance among taxpayers is not high.

While the legislation has not yet been passed it is expected to apply from 1 April 2014.

The new rules will tax your foreign superannuation on a cash receipts basis instead of the current accrual basis.  This means you will have a tax bill when you withdraw a lump sum from your overseas superannuation fund or you transfer the fund to a New Zealand super scheme (or an Australian super scheme).

The sting with the new rules is that the amount of the withdrawal or transfer that will be subject to tax depends on how long you have been in New Zealand.  Those that have been in New Zealand the longest will have the higher tax bill.  For example, those that have been tax resident for 7 years will only be taxed on 18% of the withdrawal (or transfer) while those that have been tax resident in New Zealand for more than 26 years will be taxed on 100% of the withdrawal (or transfer).

The Good News – there is an Amnesty period

While the new rules seem harsh, especially for those who have been in New Zealand for some time, there is an opportunity to lessen the blow.

There is a proposed amnesty period if the foreign super fund is withdrawn or transferred before 1 April 2014.  In this case, only 15% of the withdrawal (or transfer) will be subject to tax.  This, for those that have been in New Zealand for more than 7 years, is a better option than having a higher percentage subject to tax if the transfer or withdrawal happens after 1 April 2014.

For those of you that withdrew or transferred the funds in prior years and did not apply the correct tax treatment at that time, you can also benefit from this amnesty rule and choose to pay tax on 15% of the withdrawal (or transfer), which for most, would be a better option than having to refile prior year tax returns under the tax rules that existed at that time and suffer IRD penalty and interest charges.

Big Brother is watching

If you are thinking your withdrawal or transfer that occurred in the past won’t be detected, do bear in mind that the IRD will be asking the New Zealand superannuation schemes to provide details of those people who have transferred their overseas superannuation funds into New Zealand schemes.  While the IRD is bound to have a dollar threshold that they will not look at, there is no telling how low this threshold will be.  If you want to sleep well at night, perhaps you should consider coming clean in the amnesty period and capping your tax liability (and interest and penalties) at 15% of the withdrawal or transfer.

So what does this mean for you?

Deciding to cash in or transfer your foreign superannuation can be a big decision for some.  There are many factors to consider; with the tax implications being just one of them.  But for some of you, the tax implications could be significant.

In very general terms if you:

  • have withdrawn or transferred your foreign superannuation to New Zealand in the past and not paid tax – by acting now you may be able to decrease your tax liability;
  • have been in New Zealand for longer than 7 years and have not withdrawn or transferred – it may be possible to significantly reduce your tax liability by withdrawing or transferring before 1 April 2014;
  • have been in New Zealand for less than 7 years and have not transferred or withdrawn- there may be no rush to cash in or transfer your super fund before 1 April 2014.

What should you do next?

The current and proposed tax rules for foreign superannuation can be tricky and you really need to be speaking with your accountant or one of our tax specialists in the Tax Consulting team to discuss your situation.

While the aim of the new rules is to simplify how the tax rules apply to foreign super, some of the calculations are complex, as is determining when you are considered New Zealand tax resident.

Once you have taken tax advice and concluded that you should look to transfer your foreign super to New Zealand before 1 April 2014 time will be of the essence.  The sooner you act the better.  Some foreign schemes can take more than 3 months to action the transfer and you may need to enlist the services of a pension transfer company and a authorised financial advisor which does not leave much time between now and 1 April 2014.

For more information please contact Shelley-ann Brinkley.

Shelley-ann BrinkleySenior Manager – Tax Consulting
T +64 9 414 5444

Find updates

This article was originally created for Hayes Knight (now Nexia Auckland).